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Issue #1535      15 February 2012

Editorial

RBA head in the sand … again

The Reserve Bank of Australia (RBA) has its head in the sand yet again, failing deliver an interest rate cut at last week’s meeting. The RBA acknowledges that forecasters have lowered their estimates of economic growth in the Australian economy, but sees no need to stimulate the economy with a reduction in the official rate. It seems to think the EU and US are on the way to recovery. “Information on the Australian economy continues to suggest growth close to trend, with differences between sectors,” it says, ignoring the gravity of the situation in those sectors that are shutting plants and sacking workers. Alcoa is set to be the latest, with the jobs of 600 workers in Geelong on the line.

Two of the Big Four banks announced increases in interest rates on home loans prior to the RBA’s decision. Watch this space for the other two. They claim this is necessary because of higher funding costs on international markets. While the increases are relatively small, expectations are high that there are more to come. The housing market is already recessed, with falling prices and properties sitting for months and months on the market. It is not because there is a surplus of housing, quite the contrary. There are a number of contributing factors.

One is the fear that interest rates will rise. Another is the ending of the government’s additional first-home buyer’s grant. Rising unemployment, job insecurity and increasing casualisation of work have compounded the situation. Banks are also making it far more difficult to obtain a loan, some basing the amount they will lend on how much less they think the property will be worth in a year or two’s time! The banks and RBA have delivered a huge blow to the housing construction industry.

They have also delivered a huge blow to the manufacturing and tourism sectors, driving up the value of the dollar. This will increase the price of exports and reduce the cost of imports. This means more sackings, more closures, more businesses going offshore.

It won’t hurt the mining sector at the moment because commodity prices are so high. But, inevitably, as production continues to increase with the billions of dollars of new investments in the pipeline, resources will also be hit with a crisis of overproduction. How quickly that happens depends largely on the impact of recession in the US and Europe, on China and other Asian markets. It won’t hurt the banks, after all that is the aim of higher interest rates – maintaining a stream of ever-increasing profits.

The RBA resolutely sticks to its “inflation first” policy of an average inflation rate between 2-3 percent. The inflation rate takes precedence over the impact of its policies on manufacturing and jobs. But domestic demand for goods and services has already weakened across much of the economy. Failure to reduce interest rates will further contract those areas of the economy.

Treasurer Wayne Swan takes no responsibility, distancing himself from the RBA and the banks, citing their independence. He told Parliament on February 9, in a ministerial statement on the global economy, that “… the recovery from the deepest global recession since the Great Depression was always going to be long and difficult. But a combination of political gridlock and policy half-measures has turned a tough road towards prosperity into a perilous path.”

With worse to come, the government, the RBA and banks should be acting to stimulate demand. This includes reducing interest rates. The Big Four banks exploit their monopoly over the industry, continue to help themselves. It’s time there was real competition from a bank that put people’s interests before private profit. The government cannot stand back and blame the private banks or RBA any longer. It should repeal the Reserve Bank legislation and bring the RBA under the control of parliament. It should establish a publicly owned People’s Bank, with a democratic social charter that put the needs of people and small business first. It would provide real competition to the big four, cheaper services and lower interest rates.

Next article – Humour From My Pen

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